PhD Le Van Chau, former Chairman of the State Securities Commission of Vietnam talks about issues of concerns to the fledging Vietnamese stock market and measures for stable development of the market in the times to come.
If we take the shares market into consideration only, we can see that Vietnam’s total market capitalisation in 2006 increased by 20 folds, equivalent to 22.7% of the country’s GDP in 2006.
This is a record which surprised even international investors.
Corresponding to this growth, the number of listed companies registered for trading at the two securities trading centres in Ho Chi Minh City and Hanoi increased by five times, to a total of 193 companies compared to 41 in late 2005. What should be of concerns to this fledgling market?
The number of stock investors has also increased sharply. By the end of 2006, the number of trading accounts reached 100,000, three times higher compared to that in late 2005 and 30 times higher compared to the figure of six years ago when the market was first launched.
Especially, of this total, 1,7000 accounts belongs to foreign investors, including those of international stature JP Morgan, Merryll Lynch and Citigroup. Currently, foreign investors are holding 30% of the shares of listed companies.
The Vietnam’s stock market is of great attractiveness to foreign investors.
Price of shares, an indicator that reflects the market attractiveness, reached a very fast speed. Within a year, the VN-Index gained over 500 points (164%), from 305.28 points on December 31, 2005 to 809.86 points on December 12, 2006.
If the results of other sectors of the securities market reached in 2006 added, such as total listed value of the bond market, including gorvernment bonds, city bonds and banking bonds which accounted for 7.7% of GDP, the establishment of financial institutions including 23 securities investment funds with a total investment capital of US $2.3 billion), over 50 securities companies with total chartered capital increased by 4 times against 2005, 12 fund management companies, three investment funds and six banks providing depository service, there is enough reason to affirm of the boom the Vietnamese stock market.
These results have shown certain significance.
Firstly, it has affirmed the establishment of a capital source, or more accurately, a channel to encourage the creation and distribution of capital for a long term for the economy. This is of great significance to the Vietnamese economy of fast growth.
Secondly, it has shown the demands and capacity of participating in a new market of high level, complication and high risks of Vietnamese people as true market investors.
Thirdly, the booming of the stock market, with total market capitalisation increasing by 20 folds within a year has shown the strong internal strength of Vietnam which has yet to be fully tapped. Having had a new market, the country’s powerful internal strength has been awakened up, contributing to national development in the coming period.
Fourthly, the stock market is a high-level market, which requires transparency, publicity and dynamism. The fast development of the stock market has contributed to promoting economic reforms, speeding up the economy towards more transparency and publicity and flexibility. Thus, the development of the stock market in 2006 not only contributed to boosting the development of a new market in Vietnamese economy but also to promoting the quality of the whole structure of the current market economy in a comprehensive manner and higher quality.
However, experienced securities investors and market analysts have many times warned that the booming of the securities market in 2006 may create a danger: the market is too hot.
Thus, it is necessary to assess seriously and in details the real situation of the Vietnamese stock market which is currently of great interests.
In general, the Vietnamese stock market is still fledgling, at a low-level, not stable and of high risks.
The total market capitalization in 2006 of 22.7% GDP was achieved thanks to the increase in prices. Sudden increase in prices often contain ‘virtual’ elements, leading to inaccurate assessment of the market’s real strength. This comes along with the threat of “bubble" blow-up.”
The fledgling Vietnamese stock market also includes another characteristic: low business level. This has been seen in the following points:
The market’s subject structure is not solid. Over 90% of the securities investors are individuals, accounting for over 70% of the traded share volume. Many of these investors lack fundamental and systematic knowledge about securities investment and are inexperienced about securities trading. Their acts are much influenced by the “crowd psychology” and of high spontaneity, thus making the market change in an unprecedented manner and suffer high risks. This was seen clearly in the sudden growth in late 2006.
The Securities Law has been approved by the National Assembly, but it has just been put into force. In general, the current legal framework ensuring the effective operation of the securities market is insufficient and weak.
In addition, there is a strong shortage in securities trading and management-related human resources. The sharp increase in the number of securities companies, fund management companies, banks and enterprises taking part in the securities market requires a great number of these high-level human resources.
Moreover, the inadequate and uninterested development of the system of market institutions in the economy also adds more weaknesses to the Vietnamese stock market.
The existence and normal operations of the securities market requires that the development of other basic markets including the real estate market, the labour market, the currency market, etc, must reach a certain level. If not, the securities market lacks an essential firm foundation for development. And the Vietnamese securities market is currently lacking this fundamental premise condition.
The Vietnamese securities market is entering the year 2007 with both opportunities and challenges. We have every reason to affirm that the market will keep growing strongly in 2007. The high economic growth of the national economy within the context of international economic integration, the high acceleration of the securities stock market, the booming of the enterprises sector looking from the securities market development point of view, including the boosting of the State-owned enterprise equitisation programme, the increase in the number of listed companies, the quick growth of the foreign-invested sector, the increasing attractiveness of the market to international investors, etc, are the elements that ensure a bright prospect of development of the Vietnamese securities market.
Some measures should be taken for stable development of the Vietnamese fledgling securities market.
First of all, conditions should be created for a balanced development of functions of the securities market. Attention should not be paid too much to the circulation of capital through changing the rights of ownership and proper attention is required to the function of long-term capital mobilisation for the economy.
The legal framework for the operations of the securities market should be quickly completed. The dissemination of information should be made in a way as to make that the securities market a market of publicity, and transparency as it should be.
Inspection and supervision of securities trading activities should be strengthened.
The implementation of these three measures will help ensure the healthy development of the securities market right from the beginning.
To this end, the State Securities Commission of Vietnam plays an important role. In detail, the Commission should have more independent rights and more responsibility for the operations of the securities market.
It is also greatly essential to strengthen the training of the human resources for securities trading activities as it decides the long-term growth of the Vietnamese stock market.
The securities market should be restructured towards transforming the current securities trading centres into modern Stock Exchanges, building a separate government bonds market, strongly developing securities companies and investment funds in both quantity and quality to increase the quality of investment.
Efforts should also be paid to actively developing basic markets to create a solid foundation for the quick development of the securities market.